How Health Insurance Undermines Quality Competition
In a previous post, I argued that wherever providers compete for patients based on price, they also compete on quality. It turns out that the reverse is also true: when they don’t compete on price, they don’t compete on quality either.
This post is based on a paper I originally wrote with Gerald Musgrave and Devon Herrick for Health Affairs. Two parts of the paper were instead posted as blog entries (here and here) at the Health Affairs blog. This is Part III.
To bring readers up to speed, let me briefly review the general model.
In a third-party payment system, the provider’s fee, including the money price paid by the patient, tends to be set by an entity outside the doctor-patient relationship. For a given unit of service and a given total fee, that leaves a time price, quality and amenities. Of these three variables, however, only two are typically visible or inferable. The quality variable is normally hidden. As patients respond to what is visible and move back and forth among providers, there will be a tendency toward uniform wait times and uniform amenities. (Think of these as the market clearing time price and the market clearing level of amenities.) Or, if there is a trade-off between waiting and amenities, the rate of substitution will tend to be uniform.
There are no natural equilibrating forces bringing about uniform quality of care, however. As long as quality differences remain invisible, they can persist without affecting the patients’ demand for care. This is consistent with the findings that the quality of care varies considerably from provider to provider and facility to facility, as well as the discovery that variations in the quality of care delivered are unrelated to the kind of insurance people have or even whether they are insured at all.
But why don’t providers with superior quality take advantage of that fact and advertise it to patients? In other words, why doesn’t quality competition arise in health care the way it does in normal markets? Consider two cases.
Health markets with third-party payment and restricted supply. Imagine a health market where supply is restricted and where demand exceeds supply at a zero (or minimal) money price — both for the market as a whole and for individual providers. Under these conditions, which roughly describes most primary care practice, the provider’s time will tend to be rationed by waiting. Improvement in the quality of care (if perceived or communicated) will potentially increase demand — maybe even attracting new patients. However, the increased demand will be initially reflected in increased waiting (higher time price), which in turn will cause some of the initial group of patients to see the doctor less often. On the other hand, a decrease in quality of care (again if perceived or communicated) will diminish demand and lead to shorter waits (a lower time price), thus inducing some of the remaining patients to see the doctor more often.
But since the doctor’s time is already fully utilized, and since the fee is fixed, in neither circumstance will the physician’s revenue be much affected. The same principle applies to amenities. In the face of rationing by waiting, amenity improvements will not in general increase the provider’s income, and amenity degradation will not in general decrease it.
So in comparing two practices — one which predominantly relies on price rationing to clear the market and one which relies on rationing by waiting, we would expect both amenities and quality of care to be higher in the former than in the latter.
Health markets with third-party payment and unrestricted supply. Unlike the market for physician care, in most places the hospital market is characterized by relative freedom of entry. How the hospital competes is likely to be influenced by the type of third-party payment it receives. With mainly Medicaid patients whose reimbursement rates barely cover the cost of care, the hospital’s incentive is to keep its rooms fully booked and avoid excess capacity. Under these circumstances, there will be little incentive to improve the quality of care or the amenities surrounding that care. Rep. Bill Cassidy (R-La.), for example, has described his experiences at a Louisiana hospital that typically puts four patients to a ward and provides only the barest of amenities.
On the other hand, hospitals with predominately privately insured patients may find that third-party reimbursement rates more than cover the cost of care. These facilities can afford to have excess inventory (empty beds) — so that supply exceeds demand. Unable to compete for patients by lowering money prices and with time prices bumping up against a minimum constraint, providers have an incentive to compete by providing higher quality and more amenities. How will they respond?
Some of the literature on hospital economics suggests that quality improvement is quite expensive, and that dollar-for-dollar amenity improvements will increase hospital revenues by more than quality improvement. This is coupled with surveys that find patients more sensitive to amenity changes than to quality changes. (Of course, this latter finding may only reflect the fact that hospitals aren’t really trying to communicate quality information.)
These observations suggest that in vying for additional patients hospitals have an incentive to invest more in amenity changes than in quality changes; and this appears to be what hospitals do.
Conclusion. A major reason why health care quality varies is because of the third party payment system. Four critical aspects of health care delivery are interrelated: the underlying cost of care, wait times, amenities and quality. Those four aspects are rivals for managers’ attention and organizational resources. In competitive markets, they will tend to be brought into an equilibrium reflecting their value to the consumer. In health care markets the lack of price competition at the patient level, leads to greater quality variation than would occur otherwise. This finding is consistent with the observed characteristics of markets with little out-of-pocket payment and has important policy implications.
In general, any move to promote price competition will probably promote quality competition indirectly.
Interesting and important. I need to think more about it to fully understand it. Does the paper cover the whole issue?
In the third party payer model “healthcare” becomes a commodity, so there is NO competition other than who will accept their payment options. FOr years I have been saying the only way to achieve sustainable costs is through competition on cost and quality, as they go hand in hand. At http://www.MediBid.com that’s exactly what we do. Patients become informed consumers, and shop for medical care across state lines and international borders, and they compare both cost and quality. The evidence proves that costs are going down. It is working.
Good post. I’ve liked all your posts on quality. They are original.
And since it undermines quality competition, can we conclude that health insurance also undermines quality itself?
We need more docs to remove themselves from the third party system. I did just that I. 2008, and now I market myself for the quality and quantity of time I spend with my patients. This is definitely lacking in the present system. I also offer choice to patients in payment with either payment per service, or a prepaid low price yearly fee, lower by at least half of most retainer only practices.
Why do I price myself lower?
Simply to compete in a market for healthcare. Guess what? 3.5 years into this I am finding out my “monetary value” to my patients and community.
Isn’t it amazing how there actually is a free market in healthcare that works when you decide to work it!
http://Www.drhorvitz.com
Exactly right Lucy
Good for you dr.h we need more docs doing that. Sure some billing clerks will be out of work but we will all be better off
The Louisiana example reminded me that when my brother worked for a year at the Charity hospital in New Orleans in the mid-1970s, the amenity patients did without was air conditioning! They kept all the windows open and used lots of fans, as they had for generations. Today, we might consider the N.O. hospital as lacking in quality of care.
My point is that unless patients aren’t aware that there are alternatives that are comparably better, they probably don’t realize how poor the quality of care is that they are getting. E.g., high infection MSRA rates indicate doctors aren’t washing their hands etc. between patients — but who, if they were aware of it, would tolerate a food server handling their food with their bare hands?
A substantial increase in the use of Healthcare Savings Accounts would correlate and validate with this discussion: if you greatly increased the pool of people who were making personal choices with their healthcare dollars they would become more savvy in regards cost and quality. Likewise, providers of health care services would rapidly become far more transparent in price and quality in a competitive effort to capture market share.
@Morris Bryant, MD
The biggest growth in my practice is from patients with hsa’s !!!
I have compiled data from 3,800 doctors offices which indicate clearly that cash patients have 2 nd highest number of visits per year second only to Medicare patients… And non-third party payer clinics are second in profitability only to veterinarian clinics
John, Admittedly there have been few price/quality signals to consumers to date. However, as I’ve posted many times before: I believe third party payers will soon return to a table of allowances with electronic tools and patient advocacy services that will “grease the skids” to a marketplace based on price and quality. See what is being done with Castlight and Compass SmartShopper for example.
Many people cannot fathom a world where your health plan does not pay for most of your medical care. However, when you think about it, the interaction between consumer (payer) and seller is where innovation, competition and customer service comes from. The seller continually looks for customer-pleasing amenities to entice a sale. In health care, third-party payers aren’t looking for new ways of spending their money. If third-party payment was only used for catastrophic care, there would be more patient-pleasing services, better quality and more efficiency.
Joe,
Having trained at Charity Hospital in the mid-80’s, we did have challenges. It is closed after Katrina. That said, the quality of care was excellent especially in trauma care. Although a teaching hospital with all the interns/residents in training, the staff physicians from Tulane and LSU were outstanding. They had seen it all. Residency/fellowship training at large charity hospitals gives newly trained physicians so much more experience in seeing lots of pathology. That does not mean that they are better qualified than other programs. It only means that they may have been exposed to more cases. Quality will be determined by each individuals knowledge, experience and a desire to have a life-long commitment to self-study and patient care.
Resident training has evolved. It remains to be seen if having a shorter work week (to decrease resident fatigue/poor decisions) will have an affect on their training and quality as young physicians after training b/c of decreased patient care time.
In terms of MRSA, hospitals physicians/nurses/staff have been diligent about decreasing infectious disease rates in hospitals for years. In some hospitals, nasal swabs are being done on patients that may be colonized with MRSA so as to isolate and treat.
I currently am in a health policy class in grad school, and this topic is so hot right now. I love the conversation going on here. I truly believe in what is being said. With third-party payors, there is no room for the competition. The buyers are either patients that pay privately or have hsa’s or they are the employers that are buying the insurance companies. The sellers are truly the insurance companies. They have all the control. As long as they are in control, there will not be incentives for quality of care. I love the idea about the doctor removing himself from the third party. This is novel. I think this would actually be a wonderful thing, and if more people find out how you are profiting, it may catch on.
I also believe that when people have insurance, they just do what they are told to do. They don’t have a say-so in what hospital they at or what the conditions are there. They go there because that is the place the insurance pays for. IF you take third-party out of the equation, it would motivate the “buyer” to price-shop and shop around for the products/amenities they want. The way it is now, this just is not happenine.
Ashley, you should come to the doctors and patients town hall in Nashville see http://www.doctorstownhall.com
According to some of the hospital employees I’ve talked with, hospitals with more private pay patients may have an easier time hiring competent staff at prevailing wages. The claim was that they provide better working conditions (amenities may come into play here) and that both management and patients tend to be better to work with.
John: Clearly, your bus to market-based medical purchasing is leaving the station and is full of believers. I still have enough questions to keep me from boarding. I understand how cash customers armed with their HSA’s can shop for primary care. It is relatively inexpensive, the service understandable, and the practicioner an individual who is accountable. The bulk of medical dollars, however, are spent on specialists, facilities, and pharmaceuticals. These services are far more expensive, rarely understood by the average patient, and, in the case of the hospital, faceless. Often, they must be accessed emergently. One may be fortunate to have a referral from a physician whom he trusts. In actuality, the referral source most often refers subjectively to those with whom he practices and the hospital with which he is most knowledgeable. He rarely has objective data. There is no time for price shopping or comparing quality parameters online. As regards quality, the sophisticated patient usually selects a big “center, generally a good choice.
Unless you or your bloggers have examples in which patients can easily purchase emergent speciality or facility care whose services they understand and pricing they can afford, then their HSA’s have no negotiative power in these instances.
Lest you view me as a lost soul,I share your premise that quality would be enhanced by a link to pricing. I also agree that the development of high quality, lower cost medical services would be fostered by a competitive markleplace. Whereas you espouse the power of individual relationships between patients and providers, I feel that any significant changes in quality and cost have to be initiated by large provider groups, eg the Mayo Clinics or Baylor Hospitals. To do this, they must have financial incentives. The financing must come from a large payor who purchases care on behalf of a large group of bundled patients. In this senario, the patient is represented by a payor with clout, those who deliver the care are charged with its quality and cost, and there is a marketplace.
I know that this is the old HMO capitation model which was repulsive to patients and practioners alike. It was repressive when all decisions came from the insurance company. On the other hand, when risk was assumed by physician groups, they took responsibility for quality and patient relations. These often failed because of lack of adequate funding, business experience or integration with a hospital partner.
I would offer DRG’s, an initial fright to hospitals, as a great example as to how hospital utilization became more efficient overnight because hospitals were suddenly fiscally accountable. If cost of care in this country is going to change, providers should be given the initial opportunity before the federal government caps it with Obamacare or Ryan’s vouchers.
Tom Newsome
John,
In terms of the 4 critical aspects of HC delivery.
There are big differences b/n outpatient and inpatient physician care. The type of physician (primary care, hospitalists, specialists) and practice styles vary completely and have a huge affect on quality, costs, decrease hospitalization rates, etc.
Patients who have easy/early access to primary care (like concierge/retainer-based practices) obviously have better outcomes, decrease cost for the patient and third parties, and better quality of care as determined by the consumer (patient).
Hospitals are a different story:
Hospitalists are the captain of the ship…often they are burdened with a high patient load.
It’s simply hard sometimes for patients and their families to have access and contact with a busy physician. Particularly when they are not your regular physician. Same goes with specialists…
Quality of care is great but sometimes it’s difficult to coordinate care with many physicians involved in a case. Does it increase wait times? Many of you may relate to that. Does it decrease or increase costs…yes and no…it can increase it if the right hand isn’t talking to the left. Ya’ll may have noted that hospitalists rotate frequently so that patients are taken care of by different captains of the ship.
It may decrease it if the hospitalist is on site and easier to get in touch with b/c a primary care doc may be in a busy practice and find it difficult to go to the hospital if needed.
Don’t forget that physicians are the spoke in the wheel. We “manage” the patient and “organize” their care. We determine what tests need to be ordered to help diagnose a patient and determine treatment plans.
We make decisions on how long they stay in the hospital (usually)….
Tom,
You are correct to say “The bulk of medical dollars, however, are spent on specialists, facilities, and pharmaceuticals.”
That said, primary care physicians who know their patients well and have time to spend with them, do cut the price tremendously.
For example:
A third-party evaluation of 2008 data showed that MDVIP (Concierge practice) patients had 61.3% fewer hospitalizations compared with similar patients in commercial insurance plans, and 74% fewer hospitalizations compared with Medicare patients of similar age, gender, and disease risk.
Lest you view me as a lost soul,I share your premise that quality would be enhanced by a link to pricing. I also agree that the development of high quality, lower cost medical services would be fostered by a competitive markleplace. Whereas you espouse the power of individual relationships between patients and providers,
Your premise that any significant changes in quality and cost have to be initiated by large provider groups, eg the Mayo Clinics or Baylor Hospitals may apply to certain situations…like specialty care/ timely diagnoses and treatment of specialty care (Cancers, Coronary artery disease, etc)
but, it doesn’t apply to some of the big costs you note if they have a physician who can spend the time to get their prescription costs down, negotiate cheaper facility fees (MRI’s, CT’s), labs, have great follow up and keep the patient OUT of the specialists office….
There is also a problem with getting accurate information about quality. If we can get better at reliably measuring outcomes (plus, reporting them in a way that makes sense), you might start to see more competition based on price.
@virginia:
I would quickly agree that the average consumer is not too skilled in judging health care quality. It is like all other skills: it must be learned and practiced!
@tom: I would agree that in the emergent situation, the consumer is in a disadvantaged position to judge quality and make choices, but then I am in the same position if I have to call the fire of police dept in an emergency. I have little choice but to rely (hope) that they are competent to provide the services I need. ( I do recognize that I don’t have to make a copay when they show up).
In a sense, our licensing and board certification organizations should serve as standards to assure basic levels of competence and quality in medical decision making.
Chris, you point confirms what I talk about when I say that pa’s increase costs since they order more costly tests
@Tom,
We at http://www.medibid.com have examples daily of people shopping for major surgery and paying cash, or through HSA’s every day. We’ve had a patient get a CABG for $10,000, knee replacements for $10-$13,500, hernia repair for $3,150, and many more
Ashley
I agree, this is definitely a hot topic. Many insured do not feel they have much say in their health care choices because the “sellers” the insurance companies tend to dictate what healthcare providers and facilities they have access to. More education is definitely needed to educated the receivers of health insurance on their choices.
Angie (and all):
I agree that the insurance companies do often dictate what the consumer has access to. My question is how do we educate those on choices when their employer only offers that one type of insurance. I feel that even if they were educated, they could not do anything about the insurance coverage they did have other than talk to the employer about possibly changing policies. It seems we are just stuck with what access we are given. I did see commercials where an insurance company offered private policies that you could purchase if you didn’t like what was offered at your work or were self-employed, but I feel you are still limited. I know there has to be some alternative, but I am so new to this that I don’t even know where the education should begin or other options to those that are available. Yes, the consumer (patient) could price shop, but if the insurance is going to pay x amount either way, what incentive does the patient have?
I think a good starting point for the education, would be to let the employee know they can talk to their HR department’s insurance rep. Making them aware of the issue and to see if they have any suggestions or recommendations,even if HR does not offer recommendations the department is made aware of the issue and hopefully will take it into consideration when contract time comes around. They could also be educated on the appeals process.
Angie,
Third party payers only dictate what you are “entitled to”, if you purchase the kind of plan which lets them do it. Personally, I do not like those plans, I prefer the one that are lower in cost, and higher in control
@Chris
Clearly, involved PCP’s do provide better integrated and lower cost care. The key term is “involved.” Most PCP’s do not remain involved afer making a referral. They have neither the time nor financial incentive to do so. This is the appeal of the capitated concierge practice where the PCP is responsible for the entirety of his patient’s care. Today, the concierge doctor is an anecdotal piece in our delivery system. He needs to be the front of an integrated provider system. In my opinion, capitation needs to be extended “upstream” to the specialists and, ultimately, the corporate partner. Every level of the provider chain needs to have a fiscal responsibility to deliver the highest quality care at the best value to the payor who is ultimately the patient.
@Ralph
The examples of shopping for care overseas are well reported and your Medibid website has examples of negotiated prices for individuals, but this remains a very small market and has little effect on national costs. With little objective data available, the patient knows little of the quality of the hernia surgeon in Florida or the colonoscopist in Texas. The prices quoted are higher than those I received from insurance payors. For this reason, I remain skeptical that individuals with HSA’s can drive the market. I think that meaningful management of costs and quality must come from large payors who become more demanding of providers. In turn, these providers must integrate to produce results which spell quality care for patients and satisfactory reimbursement for providers. Either, as a nation, we accept and pay for our increasing cost of care as a percentage of GDP or we change.
Tom Newsome, MD
@Tom
Capitated concierge practice is not the way to go. Instead capitate the patient, who has a fixed amount of healthcare money to spend, or rollover towards future care. As a physician, you know that docs in no way can or should be responsible for patients lifestyle choices. If the govt wants to get involved, fund the hsa of lower income patients, on a graduated scale.
As for hsa’s, they still are a small part of the market. For them to succeed we need transparency of pricing. Then they would flourish, and the micromanagement of insurers would disappear. If we had true transparency of all the costs the insurers place on healthcare, and allocate towards their overhead, they would be closed by public opinion alone.
Also docs should not be “reimbursed”. They should be paid directly by the patient or the catastrophic insurer.
Costs ate only rising because they are hidden from public view. Open them up and watch the competition start!
You are correct, this is a cruel issue. Why lhuosd medical professionals be forced to conduct procedures they feel are morally wrong? You are trying to imply that so many issues are effected by this bill when you are pointing straight toward the abortion debate. According to your philosophy, a person lhuosd be denied their pursuit of life, liberty and happiness because of their religious or moral convictions. That is not very advanced thinking. If someone wants to be an OBGYN and not perform the elective procedure of abortion, he/she lhuosd have every right to do so. I am shocked at how closed minded your argument is. These people (who do not want to perform abortions) are being discriminated against and you are the one doing it.If you want to support the elective procedure of abortion, fine. But don’t try to force others to do so. Who made you the moral dictator of the universe?
Thats because the product used to be medical care, and now it’s payments